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US equities’ attraction towards January highs continued to operate yesterday with international markets also supported by a snapback rally in Chinese equities. The dollar traded lower (vs. DM and EM) and the Euro gained vs. GBP and CHF with GBP sentiment remaining impaired by news earlier this week that Deutsche Bank is shifting more clearing staff to Germany. CHF weakened slightly as fears about Italy receded and as results of UniCredit came in better than expected. 10-year Bund yields rose 2 bps to 0.41% and 10y Treasuries climbed 3bps to 2.97%. Volatility declined further with the Vix falling to 10.93% (from over 14% last week). After tweeting over the week end that he had the upper hand in the trade war with China because Chinese equity markets were going down (!), causing another hard selloff in Chinese shares on Monday, D. Trump tweeted yesterday... “The Iran sanctions have officially been cast. These are the most biting sanctions ever imposed, and in November they ratchet up to yet another level. Anyone doing business with Iran will NOT be doing business with the United States. I am asking for WORLD PEACE, nothing less! This tweet came one day after EU diplomatic chief Federica Mogherini and foreign ministers of Britain, France and Germany pledged to keep "effective financial channels" open with Iran, invoking for the first time the “blocking statute” whereby the EU will seek legal protection for EU firms to work with Iran, banning any EU company from complying with US sanctions and refusing to recognize any foreign court rulings seeking to enforce American penalties. The near-term impact of the European reaction will be ... not much... as most European companies have already said they will pull out from Iran but the political signal was significant. It is the first time that Europe delivers a spinal response to reject US legal overreach and the de facto US foreign policy of penalizing and trying to suffocate with various degrees of success any regime (Venezuela, Russia, Iran, now Turkey being the most recent examples) it strongly disagrees with, even as it contradicts international accords. This public condemnation is bound to also increase the awareness of the general public and should lead to behavioral changes that will rapidly cost the US dearly as suggested by the 40% decline in US July car sales in China (for cars built in China or in the US). The same will happen in Europe and people will likely avoid buying American unless forced to. This is a first serious hole in the cuirass of the US legalist system and there is some likelihood that another important legal battle will be launched from Europe to counter tech giants paying nearly no tax in Europe while exerting a powerfully destructive action on its industrial and commercial tissue. Amazon is indeed a highly destructive business (operating at its best at ‘breakeven’ levels where it pays no taxes and place others out of business) that even D. Trump dislikes and which should now be restrained from the angle of its hyper-dominant position and tax avoiding position. The first shots will be fired from Europe in a proper legal context and this battle will start soon, in our view. We have talked about how share buybacks and delistings is actually weakening the capitalist nature of the US economy (a system whereby private savers can meet entrepreneurs to fund their business). We had another illustration of this yesterday with E. Musk saying he has plans to take the company private. He cannot buy back shares himself (because his cost of capital is too high and the resulting leverage would be close to 100). But the company is losing money every day and therefore will need fresh money soon... He advised shorts to cover but ... they did not, at least not in July. E. Musk will need USD72bn (to buy back the company with his generous offering of 420/share but he tweeted yesterday that he has secured the necessary funding.... Our view is that Tesla has become a national emblem and that unless a solution is found quickly, Tesla (the company) might go in flame no later than this year. Tesla needs fresh funding (especially now as it finds more difficult to sell cars in China and Europe) or to be bailed out somehow. In any case, the short-term market impact was to jolt Tesla share price higher by 10%, half way to the target price of USD420, taking the general market up with it ... Gold was slightly higher on dollar weakness although Gold shares traded mostly lower. Bitcoin (-4%) and Ripple (-7% overnight) are getting crushed again confirming a lower low, lower highs pattern that suggests renewed upcoming weakness and ultimate convergence towards the intrinsic value of 0 in our view) for this entire sector.

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